Biden’s Climate Law Can’t Die. Wall Street Loves It Too Much.

The optimistic case for the Inflation Reduction Act — even under a Trump presidency, even with a Republican trifecta in Washington — rests on a “public investment first” view of climate policy. Public investment in the clean energy economy is not merely a second-best policy option to carbon pricing or other punitive regulations, the argument goes, but instead the first-best option in the marathon of politically durable decarbonization.

I am an outspoken proponent of this view. Public investment provides and encourages investment to drive down the cost of clean energy technologies, make them more market-competitive, and thereby reduces emissions by permanently shifting demand away from fossil fuel-dependent ones. Public investment in clean energy technologies can also create the conditions for new constituencies to gain political clout and defend their role in the economy, and for further policy ambition in the future.

The first major sign that public investment under the IRA might prove durable came in August, when a group of 18 House Republicans wrote to Speaker Mike Johnson in support of the clean energy tax credits that are the cornerstone of the legislation, emphasizing the job creation benefits of the policy. Even the American Petroleum Institute and U.S. Chamber of Commerce said back in May that they would support the IRA under a Trump presidency. Driving down costs? Check. New constituencies? Check.

It’s tempting to see this glimmer of change in favor of clean energy incentives as the consequence of groundswell political support, as voters see benefits arrive in their communities. Journalist Kate Aronoff calls this “pool party politics," named after the New Deal’s high-visibility spending on public pools which curried popular favor in the 1930s. The IRA’s benefits do tilt heavily toward red districts, so it would be nice to imagine that Republican elected officials are hearing bottom-up support and dutifully reflecting constituent interest — democracy in action.

Let’s call that the optimist’s view. My view, which one might call the “cynical optimist’s,” is that politicians — red or blue — are often more responsive to the concentrated interests and influence of lobbyists and donors than the electorate. The IRA may have gained popularity in Congress, including among Republicans, as financial and corporate interests — “capital” — started becoming IRA fans. Tim Sahay of the Net Zero Policy Lab at Johns Hopkins has called the IRA’s tax credits a “bottomless mimosa bar” for the financial market, and bankers are swanning up to get smashed on unlimited tax incentives for clean energy investment.

I favor the cynical optimist’s view because I believe it to be a more accurate picture of why the IRA is good politics. The “cynical” part recognizes that capital exerts disproportionate influence over the political process; the “optimist” part celebrates that the IRA is a powerful vehicle to appeal to their economic values. Bottomless mimosa bars aren’t just booze giveaways — they work by bringing in new customers who then stay and pay for their meals. Reformulating the interests of capital through public investment is a pragmatic and necessary antidote to the inertia of the incumbent fossil fuel industry.

A great example of the IRA gaining new types of fans is its program of expanded, transferable clean energy tax credits. Not only do these tax credits redirect tax revenue toward clean energy investment, making more projects economically justifiable, they may also develop their own market momentum. I advise Basis Climate, a platform for clean energy tax credit transfers, and when I asked co-founder Erik Underwood to tell me who is actually buying these tax credits, he told me it has mostly been savvy business people focused on minimizing their tax payments. Many of these buyers have never or only marginally participated in renewable energy deployment previously.

The tax credit transfer market has grown to $20 billion to 25 billion in a mere 20 months. By comparison, voluntary carbon markets have for decades attempted to enable green projects by creating a market for tradeable credits, yet the market is expected to reach just $2 billion globally in 2024.

In other words, the market for clean energy tax buyers has vastly expanded the base of corporates benefiting from and supporting clean energy projects, led by transactional people who want to avoid paying taxes. Now, there are tax-hating business types of all political colors, but one can already see that the politics of the IRA are shaping up differently than, say, a pollution tax that steadily gets harsher over time.

All that said, it is important not to overstate the case in favor of the IRA’s durability. Those 18 House Republicans are down to no more than 14 post-election, and the remainder may find that falling in line with the President politically safer were he to mount a full-scale attack on the IRA. They and corporate America may also love clean energy tax credits in the abstract but happily give them up to pay for a juicy tax cut for the wealthy.

Still, the most clearly durable part of the IRA are the $78 billion in public spending and whopping $493 billion in business and consumer energy investment that it has already catalyzed as of June 2024, an estimated 71% increase in private investment from the two years before the IRA. That investment won’t be undone with policy change, and it will radically change the economics of many clean energy technologies. It also lays the foundation for later policymaking, as distant as that possibility may now feel. By creating an expanded tent of clean economy interests, the “carrot” of public investment may also help future politicians and their constituencies find “stick” policies more feasible. Penalties on high-carbon products — from gas cars to steel — become much more palatable if they are merely driving substitution to other technologies that compete on price and quality, than if they’re just making the only serviceable option more expensive.

This more nuanced telling of the politics, though, means you don’t need a star-eyed, Mr. Smith Goes to Washington view of the American political process to see how the IRA is delivering political dividends. Whatever the fate of the IRA come January, the longer the benefits flow — to communities and to capitalists — the more difficult it will be to roll back the tide.